Category Archives: Investing Money

Extremely Rare Volatility Signal Says A Big S&P 500 Move May Be Coming

bear-market--My Comments: More potential woe and gloom for those with money in the markets. Will it happen today? It may have started last Friday, but who knows.

There are a lot of charts shown which I’ve elected not to include here. Instead I’m giving you a link at the bottom so you can follow it yourself and see what the author is talking about.

There are competing metrics for guessing the markets; fundamental and technical. Neither is right all the time; it is instead a different philosophy of choosing how best to respond to changes on any given day. This one is from the technical camp.

I’m encouraging all clients to put their investments either in cash or on a platform that allows an inverse position that typically makes money in a downturn. It’s your call.

Big Moves Often Follow

Regular viewers of CCM’s weekly videos may be familiar with the expression “the longer a market goes sideways, the bigger the move you tend to get after a breakout or breakdown”, which aligns with the concept of periods of low volatility often being followed by big moves in asset prices.

Lowest Level Dating Back To 1982

Bollinger band width is one way to track relative volatility. When Bollinger band width readings hit extremely low levels, it tells us to be open to a big move. The S&P 500’s daily Bollinger Band width has never been lower than it is today, using data back to 1982, which means a big move could be coming soon in stocks.


The Stock Market Is About To Have A ‘Final Melt Up’

roller coaster2My Comments: Anyone who suggests they know what is likely to happen to the markets in the coming days is probably just hoping they will be right. And that includes me.

A high percentage of significant market downturns have happened in August and September. This article suggests there is an event planned for the end of August that might be the trigger that starts the next one. Obviously we are now in September but the danger level is still high.

My suggestion is to either be in cash, or in a program designed to make money when the markets tump.

Bob Bryan – August 16, 2016

The market has one last run left.

Stocks could get a huge boost as investors worry about missing gains, according to Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch.

According to a note from Hartnett titled “The Final Melt Up,” the shift of investors from defensive stocks (such as industrials and telecoms) to more cyclical companies (retail, tech, and consumer goods) shows that investors’ appetite for risk is growing.

This will create demand for stocks and drive the market upward.

“Likelihood of melt up in risk assets into Jackson Hole growing … likely followed by jump in yields,” he wrote.

The chart below illustrates the rotation that Hartnett is noticing:

Essentially, a melt up by definition is a sudden leap in the market caused by investors rushing in because they fear missing out. It’s not a sign of improved fundamentals.

In other words, these companies and markets may not have higher earnings or be stronger investment opportunities.

Hartnett doesn’t go into the details of the end of the melt up, but the speech by Federal Reserve Chair Janet Yellen at the Jackson Hole conference at the end of the month appears to be the catalyst that will stop the stampede.

‘Biggest Bond Bubble in History’ is About to Burst

bear-market--My Comments: Broken record time again. The punditry has almost one voice and yet the markets are not listening. I can’t wait until November 9 arrives.

Aug 20, 2016 – The Irish Times

“The market can remain irrational longer than you can remain solvent,” is a famous quote, often attributed to JM Keynes. And indeed we have experience in Ireland of how a market – in our case the housing market – can remain irrational for a long period of time. The “ fundamentals” were supporting it, was the argument. And how wrong it was.

Now we have the same argument being used to support the super-low and even negative yields in bond markets, especially those for Government debt. Some $13,000 billion of bonds worldwide are now trading at negative interest rates, including short-term Irish Government debt. But with central banks pumping billions into the world economy (often by buying bonds), growth remaining at record lows and official interest rates on the floor, we are told, yet again, that the fundamentals are supporting all this.

Looks like a duck

Perhaps they are. But the lesson of our housing market reflects the theory about something that looks like a duck and quacks like a duck. And so enter Paul Singer of Elliot Management, who should know something given that his hedge fund manages $28 billion in assets.

He told investors in a letter this week that, in his view, the turnaround in the bond market was likely to be “surprising, sudden, intense, and large”. He said he believed we were in “the biggest bond bubble in world history”, and advised investors to avoid sub-zero yielding debt.

“Hold such instruments at your own risk; danger of serious injury or death to your capital!” he wrote, according to CNBC.

Of course such warnings have been made for the last couple of years and, despite them, bond prices have continued higher and yields – or interest rates – have continued to decline. It is hard to know what might burst the bubble, with little sign of a big take-off in growth or inflation. But common sense would suggest that investors paying governments to lend them money to cover their budget deficits really doesn’t make a lot of sense.

As Singer said, it could all end with a bang. But when, and why, is the really hard question to answer.

Here’s How You Know The Stock Market Is Hugely Overvalued

roller coaster2My Comments: Worrying about your money is a normal activity. At least it is for me.

That being said, to the extent you have money somewhere where your principal is not guaranteed, I think there is a high probability you will soon suffer some losses.

Actually, unless you sell at a loss, you really haven’t ‘lost’ anything. But if your account value drops, and you are old like I am, you may not have the necessary time to wait for it to recover. That’s because you may be using it to pay your bills, and chances are those bills will continue. Unless of course you die, which means it becomes someone else’s problem.

Mark Hulbert – August 16, 2016

The U.S. stock market currently is more overvalued than it was at almost every bull market peak over the past 100 years.

That’s crucial, since it undercuts one of the arguments some exuberant investors currently are using to try to wriggle out from underneath the otherwise bearish message of various valuation indicators. Their argument in effect is “of course current valuation is high; what would you expect when the market is at an all-time high?”

Unfortunately, an equally sobering picture is painted when we compare the current market not to historical averages but to just those past occasions when equities were at the top of a bull market.

In fact, as you can see from the chart (not shown), the current stock market is more overvalued, in terms of the following metrics, than it was at most of the past bull market peaks dating back to 1900.

Giving credence to this message is that it comes from six different ways of measuring valuation. That should make it harder for the bulls to dismiss the data:
1. The price/book ratio, which stands at 2.8 to 1: The book value dataset I was able to obtain extends only back to the 1920s rather than to the beginning of the century, but at 23 of the 29 major market tops since then, the price/book ratio was lower than it is today.

2. The price/sales ratio, which stands at an estimated 1.9 to 1: I was able to access per-share sales data back to the mid 1950s; at 18 of the 19 market tops since, the price/sales ratio was lower than where it stands now.

3. The dividend yield, which currently is 2.1% for the S&P 500: SPX, -0.33% . At 31 of the 36 bull-market peaks since 1900, the dividend yield was higher. (high is good; low is bad)

4. The cyclically adjusted price/earnings ratio, which currently stands at 27.2: This is the ratio championed by Yale University’s Robert Shiller. It was lower than where it is today at 31 of the 36 bull-market highs since 1900.

5. The so-called “q” ratio: Based on research conducted by the late James Tobin, the 1981 Nobel laureate in economics, the ratio is calculated by dividing market value by the replacement cost of assets. According to data compiled by Stephen Wright, an economics professor at the University of London, and Andrew Smithers, founder of the U.K.-based economics-consulting firm Smithers & Co., the market currently is more overvalued than it was at 30 of the 36 bull-market tops since 1900.

6. P/E ratio: This is the valuation indicator that is perhaps most-often quoted in the financial media. Nevertheless, according to data on as-reported earnings compiled by Yale’s Shiller, and based on S&P estimates for the second quarter, this ratio currently stands at 25.2 to 1. That’s higher than at 89% of past bull-market peaks.

To be sure, valuation indicators are not helpful guides to the market’s shorter-term direction. Overvalued markets can stay overvalued for some time, and even become more overvalued. But value eventually wins out.

For example, it was in December 1996 that Yale’s Professor Shiller gave his now-famous lecture to the Federal Reserve about irrational exuberance. His analysis struck many as silly during the subsequent three years in which stocks continued to soar; when the dot-com bubble hit he looked like a genius — and he eventually was awarded the Nobel prize.

A timely analogy comes from Ben Inker, co-head of the asset-allocation team at Boston-based money management firm GMO. He likens the market to a leaf in a hurricane: “You have no idea where the leaf will be a minute or an hour from now. But eventually gravity will win out and it will land on the ground.”

So enjoy the market’s strength — while it lasts.

This Stock Market Rally Is Going To Fall Apart

roller coaster2My Comments: Another brick in the pile that says we’re headed for a market correction. A major clue is called the price to earnings ratio or P/E. It’s a readily available metric that helps understand relative valuations. The Shiller CAPE ratio is today recognized as the better measurement of market valuations. Currently, it is almost 63% higher that it’s historic mean. That comes back to a statistical law called reversion to the mean. What goes up also goes down.

Bob Bryan Aug. 4, 2016

A common refrain around the markets and economy is that expansions don’t die of old age. But that doesn’t mean they can’t still get a bit weary.

The recent run-up in stocks to an all-time high comes in the eighth year of the current bull market, making it the second-longest such market in history. Given the bull market’s “old age,” this recent upswing isn’t going to last very long, according to Jonathan Glionna at Barclays.

Glionna, head of US equity strategy research, argued in a note to clients on Wednesday that while the recent stock surge has come on the back of strong economic data, it is not enough to push the market higher over the long term.

The strategist came to this conclusion by analyzing three previous late-stage rallies since 1980 — 1988 to 1989, 1998 to 1999, and 2006 to 2007 — and identifying three conditions that are needed to make them sustainable. They are:
1. Increasing profit margins. Profit margins in each of the past three late-stage rallies hit new cycle highs in order to sustain the rally. This time around, margins have been on the decline since the third quarter of 2014, and even with a recent bounce in aggregate profits, a new cycle high seems unlikely.
2. Growing dividends. In each of the past three occurrences, dividends from S&P 500 companies have been increasing at a rapid pace. “Fast and accelerating dividend growth was present throughout each of the last three prolonged late-cycle rallies,” Glionna wrote. “But, dividend growth has begun to slow. We project a 6% increase in dividends for the S&P 500 in 2016. This is the lowest growth rate since 2010.” Additionally, forecasted growth for the next year is just 4.5%, showing a clear slowing pattern.
3. Increasing leverage. This one is happening, according to Glionna, but it may not have much more room to grow. “While this may be a sustainable amount given the easy conditions and low rates in high grade credit, the days of accelerating growth in borrowings are likely in the past, in our view,” Glionna wrote.

“This is because some important measures of debt sustainability, such as the ratio of debt-to-EBITDA are already elevated.” Essentially, companies are running out of room to borrow more.

Each of these three trends is a sign that companies could continue to grow more in the future. Since the stock market is essentially an investment on future expected growth and earnings, then higher profits, income from dividends, or growth through leverage would inspire investor confidence.

With each of these trending in the wrong direction, investors are less likely to assume that the future of a company is going to be brighter, which in turn means the stock price is less likely to increase. Thus, investors stay out of the market, and there goes the rally.

As we have mentioned before, it’s fair to point out that past cycles may not necessarily be predictive of the current one, and a lot has changed in the markets and economy since the financial crisis.

However, past occurrences are many times all we have to predict future events. And right now, the past isn’t saying anything good.

The source article can be found HERE.

Don’t Expect To Make Any Money In The Market For The Next 7 Years

InvestMy Comments: I have no idea whether this will prove to be true or not. But it sure enters my thinking whenever I talk about money with clients and how they are going to pay their future bills. And how I’m going to pay my bills.

John Mauldin,  Economics,  Jul. 28, 2016

The next recession is coming, and it will be severe.

My friend Ed Easterling of Crestmont Research just updated his Economic Cycle Dashboard and sent me a personal email with some of his thoughts.

The current expansion is the fourth longest since 1954… but also the weakest. Since 1950, average annual GDP growth in recovery periods has been 4.3%.

This time, average GDP growth has been only 2.1% for the seven years following the Great Recession. That means the economy has grown a mere 16% during this so-called “recovery.”

If this were an average recovery, total GDP growth would have been 34% by now… instead of 16%. So, it’s no wonder that wage growth, job creation, household income, and all kinds of other stats look so meager.

I think the next recovery will be even weaker than this one (the weakest in the last 60 years) because monetary policy is hindering growth.

Now, combine a weak recovery with Negative Interest Rate Policy or NIRP. Asset prices are a reflection of interest rates and economic growth. And both are just slightly above or below zero. So, how can we really expect stocks, commodities, and other assets to gain value?

The upshot is that traditional investment strategies will stop working soon. Ask European pension income recipients about their fears.

Welcome to 0% returns for the next 7 years

All bets may be off if the latest long-term return forecasts are correct. Here’s a chart from my friends at GMO showing the latest 7-year asset class forecast.

See that dotted line, the one that not a single asset class gets anywhere near? That’s the 6.5% long-term stock return that many supposedly wise investors tell us is reasonable to expect.

GMO doesn’t think it’s reasonable at all, at least not for the next seven years.

If GMO is right—and they usually are—and you’re a devotee of passive or semi-passive asset allocation strategy, you can expect somewhere around 0% returns over the next seven years… if you’re lucky.

See that nearly invisible -0.2% yellow bar for “U.S. Cash?” It’s not your eyes. Welcome to NIRP, American-style.

The Fed’s fantasies notwithstanding, NIRP is not conducive to “normal” returns in any asset class. GMO says the best bets are emerging-market stocks and timber.

Those also happen to be thin markets. Not everyone can hold them at once.

Prepare to be stuck.

Why low-volatility ETFs are now a high-stakes gamble

roller coaster2My Comments: I don’t normally post anything on this site on weekends. But there is so much going on these days that I either have to start posting twice a day during the week or from time to time on the weekend.

ETF’s are as significant a step in the evolution of money management as were mutual funds in the early part of the 20th Century. I’m increasingly using them when it comes to my money and to that of my clients. For those of you that find all this mind numbing, please feel free to ignore it. (My source article is found HERE.)

By John Prestbo July 27, 2016

Wall Street is doing a booming business with investors who want to avoid the jitters brought on by a rocky stock market. So booming, in fact, that the performance and purpose of low-volatility investments now pose the very risks they were meant to avoid.

More than $50 billion has poured into low-volatility indexed exchange-traded funds over the past five years or so, in the wake of the 2008-09 market meltdown. There are now 14 “lo-vol” ETFs with assets exceeding $100 million each, and many more with less. Whenever the market hits a pothole, these ETFs enjoy a bump-up in assets.

Six ETFs in the lo-vol space have attracted more than $2 billion of assets apiece. The oldest fund is PowerShares S&P 500 Low Volatility Portfolio SPLV, +0.12% which began trading in May 2011 and now lays claim to almost 20% of lo-vol assets.

Yet the second-oldest lo-vol ETF is actually almost twice as large. The iShares Edge MSCI Minimum Volatility USA ETF USMV, +0.21% dominates the group, with close to 40% of the assets. One reason may be that it has the lowest management fee among the top six. Its success, in fact, spawned an iShares family of lo-vol ETFs with the “Edge” brand.

These ETFs mostly live up to their billing. Most of them achieve low volatility by holding those stocks in an index that fluctuate less than the overall index. Some newer models contrive triggers to move out of stocks and into cash when the market slumps, and to move back into stocks when the slump ends.

Whatever the methodology, lo-vol ETFs aim to be a sleep-better substitute for the broad-market indexes from which they are derived. They decline less in downturns, but tend not to rise as much in rallies — or take longer to get to the same place. Investors tend to overlook the “hidden” cost of this upside gap.

On its website, iShares says its minimum volatility USA ETF historically captured 83% of a broad index’s up months and 44% of the down months. Curiously, iShares uses the S&P 500 SPX, +0.16% rather than the MSCI USA index to calculate these statistics. By contrast, PowerShares declares on its website that its lo-vol ETF delivered 77% “up-capture” and 43% “down-capture” since inception.

That means, for a $10,000 investment and a base index that rises 10%, the iShares ETF would leave $170 on the table from a potential $1,000 gain and the PowerShares ETF would leave $230. Those amounts may look like hotel-room rates, but the upside shortfalls accumulate over time.

In other words, the longer you want to sleep well, the more expensive it could get in terms of foregone capital appreciation.

This year’s market potholes so far — the year-opening tumble and the surprise Brexit vote — are not good illustrations of how lo-vol vehicles are supposed to work. These ETFs did fall much less than the base indexes in both cases, though the “downside capture” was larger than average.

But both of these ETFs bounced back more quickly and strongly than the base indexes. Indeed, these lo-vol ETFs are more than doubly outperforming their base indexes this year through July 22.

This upside-down situation is the result of all the assets pouring into these lo-vol ETFs. The iShares fund is the third-largest asset-gathering ETF this year, according to — and as always, money coming in pushes prices up. Another result: The lo-vol ETFs this year are roughly 25% more volatile than the market.

These conditions won’t last. Reversion to the mean could disillusion investors already holding lo-vol vehicles. And for those thinking about adding lo-vol to their portfolios this state of affairs is a red-light warning that now probably isn’t the best time to get in.

Whether any time is right for lo-vol is a personal decision because it touches on fear about loss. If every little market swoon pumps up your blood pressure, lo-vol may be the answer. But be aware of the costs and consequences.

John Prestbo is retired as editor and executive director of Dow Jones Indexes, now part of S&P Dow Jones Indices, in which Dow Jones & Co., publisher of MarketWatch, holds a small interest. Prestbo also is an adviser to MarketGrader Capital, which scores stocks on the basis of fundamental factors and chooses components of the Barron’s 400 Index.